Shihao (S.) Yu

Monday, 28 August 2017
11:00 AM
Tinbergen Institute Amsterdam, room 1.60TIA room 1.60, Tinbergen Institute AmsterdamNetherlands
VU Amsterdam

This paper builds a theoretical model and studies the optimal risk management of central counterparties (CCPs). Depending on the prevailing type of default in the trading environment, a welfare maximizing CCP adopts different combinations of risk management tools. If default is strategic, clearing fee, on top of margin and default fund, is necessary to achieve equilibrium and a higher margin or default fund improves welfare. However, if default is forced, equilibrium can be achieved without clearing fee and welfare is U-shape in margin: welfare first decreases and then increases in margin.

Keywords: Central counterparties, counterparty risk, risk management